Whether Non Ratification of Statutory Auditor is Removal of Statutory Auditor
Whether Non Ratification of Statutory
Auditor is Removal of Statutory Auditor
Short
Summary:
In this
Flash editorial, the author begins by referring the provisions of Section 139
& 140 of Companies Act, 2013 relating to ratification of Auditor in every
Annual General Meeting & Removal of auditor. The main thrust of the
article, however, is upon the “indirectly
removal of Auditor through Non [1]Ratification of Auditor” and most recent case laws decided by the Hyderabad Bench
of National Company Law Tribunal in the case of [2]SPC & Associates, Chartered Accountants and
DVAK & Co.. Questions arise whether principally it is natural
justice to remove the statutory auditor during his term by non-ratification in
Annual General Meeting.
This is article no. 221 of the series of
editorials written by the author on corporate laws {including Companies Act,
2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.
Introduction:
Hence,
three year has passed when various provisiosn of Companies Act, 2013 came into
effect section 139 & 140 are one of them. As per the provisions under
Companies Act, 2013 tenure of appointment of auditor shall be 5 years and in
every Annual General Meeting shareholders will rectify the continuation of
appointment of auditor. Due to implementations of new sections and rules of
Companies Act, 2013 if in any AGM auditor is not ratify then it will be
consider as removal of auditor.
Statutory Provisions:
As
per Section 139(1): Subject to the
provisions of this Chapter, every company shall, at the first annual general
meeting, appoint an individual or a firm as an auditor who shall hold office
from the conclusion of that meeting till the conclusion of its sixth annual
general meeting and thereafter till the conclusion of every sixth meeting and the
manner and procedure of selection of auditors by the members of the company at
such meeting shall be such as may be prescribed:
Provided that
the company shall place the matter relating to such appointment for ratification by members at every annual general
meeting.
As
per Section 140.(1) The auditor
appointed under section 139 may be removed from his office before the expiry of
his term only by a special resolution of the company, after obtaining the previous
approval of the Central Government in that behalf in the prescribed manner.
Provided that before taking any action under this
sub-section, the auditor concerned shall be given a reasonable opportunity of being
heard.
Question for discussion in this editorial is “Whether
Company simultaneously needs to follow provisions of section 140(1) for removal
of auditor in case of non ratification of auditor u/s 139. As the Section 139 exclusively give the power to
shareholders for ratification of continuance of auditor so in case shareholders
are not contented with the auditor they can pass resolution for
non-ratification of auditor and such auditor shall dis- continue as auditor of
the Company.
Rulling by NCLT:
NCLT,
Hyderabad Bench ('the Bench') thereof passed an order on 17th March, 2017 on
the question whether “Company could remove its statutory auditor without prior
approval from Central Government”.
This case involved SPC
& Associates, Chartered Accountants & DVAK & Co. Hence, the
question was ‘where NISC Export Services Pvt Ltd (here after referred as
“Company”) appointed petitioner-CA firm as its Statutory Auditor for period of
five years but did not ratify their appointment in its subsequent AGM and
appointed another CA firm as its statutory auditor, since company did not
obtain prior approval of central Government, removal of petitioner was to be
held illegal or not?’ Whether as Principle of natural justice auditor should be
provided sufficient opportunity of being heard before his non-ratification or
not. Here, after analyzing the provisions of the Companies Act, 2013, the NCLT
held:
Principle of Natural Justice:
In The Constitution of India, nowhere the expression Natural Justice is used.
However, golden thread of natural justice sagaciously passed through the body
of Indian constitution. Preamble of the constitution includes the
words, ‘Justice Social, Economic and political’ liberty of thought,
belief, worship... And equality of status and of opportunity, which not only
ensures fairness in social and economical activities of the people but
also acts as shield to individuals liberty against the arbitrary action which
is the base for principles of Natural Justice.
In India, the principles of natural justice
are firmly grounded in Article 14 & 21 of
the Constitution. With the introduction of concept of substantive and procedural due
process in Article 21, all that
fairness which is included in the principles of natural justice can be read into
Art. 21. The violation of principles of natural justice results in
arbitrariness; therefore, violation of natural justice is a violation of
Equality clause of Art. 14.
In broad-spectrum, The Principles of Natural Justice have come out from the
need of man to protect himself from the excesses of organized power man has
always appealed to someone beyond his own creation. Such someone is the God and
His laws, divine law or natural law, to which all temporal laws and actions
must confirm.
Natural Law is of the 'higher law of nature' or 'natural law'. Exp: Natural Law
does not mean the law of the nature or jungle where lion eats the lamb and
tiger eats the antelope but a law in which the lion and lamb lie down together
and the tiger frisks the antelope.
Natural Law is another name for common-sense justice. Natural Laws are
not codified and are based on natural ideals and values which are universal. In
the absence of any other law, the Principles of Natural Justice are followed.
Decision of the NCLT Bench: Upon perusal of all the materials, submissions
made by all the parties, The NCLT Bench has held that:
·
The Petitioner was not
ratified in AGM held on 26.09.2016, as Principles of Natural Justice demands
that he should have been provided with sufficient opportunity before his
non-ratification. Auditor acts as a bridge between management and shareholders
of the Company and is an important professional in the whole eco system of the
corporate world. Therefore, removal/non-ratification of the Auditor without
prior notice/seeking his comments would not be proper.
·
The NCLT Bench decide
the case with following declarations/ directions:
i.
The removal of
petitioner firm as the auditor of Company and the appointment of new auditor of
Company is improper.
ii.
We direct the company
to continue the Petitioner firm as the Auditor of Company till the next AGM and
subsequently necessary course of action can be taken by Company regarding the
continuation of Petitioner firm, in accordance with law
iii.
We further direct
that Company to take necessary steps to re-appoint the petitioners' firm as
Auditor of the Company.
iv.
We direct the new
auditors firm to submit all the records available in their possession, if any,
and to cooperate with the Petitioner firm to conduct the audit of books of
account of Company.
Interpretation Note:
The
provisions of Companies (Amendment) Bill, 2016 introduced in the Lok Sabha on
15.03.2016 which seeks "to amend
Section 139 of the Act to do away with the requirements of the annual
ratification by members with respect to appointment of Auditors"
The Hon'ble
High Court has observed that the provisions of the Companies Act, 1956
underscore that statutory auditor cannot lightly be removed and the statutory
procedure has to be followed to the provisions recognized that Auditors are
expected to function as independent professionals and not simply toe the line
of the management of a company. The Central government will have to be
satisfied that the reasons are genuine keeping in view the best interest of the
company and consistent with the need to ensure professional autonomy to its
auditors. The 3 tier statutory protection is given to Auditors.
After study
the provisions of Companies Amendment Bill, 2016 and the observation of High
Court it can be interpreted that auditor is appointed for 5 year under
Companies Act, 2013 but the powers are given to shareholder to check yearly
whether auditor is qualify to continue or not by ratification in every AGM. Due
to bring to an end exploitation of provision of ratification and safeguarding
of the freedom of professional it is recommended in Companies Amendment Bill,
2016 to remove the provisions of ratification of Auditor.
Further,
Principles of Natural Justice demands that auditor should have been provided
with sufficient opportunity of being heard before his non-ratification. Auditor
acts as a bridge between management and shareholders of the Company and is an
important professional in the whole eco system of the corporate world.
Therefore, removal/non-ratification of the Auditor without prior notice/seeking
his comments would not be proper.
Further, frequent
change of auditor is not advisable for the effective auditing, preparation of
financial statement, transparency in audit policies/procedures, etc. Therefore,
Companies Act, 2013 added the provisions for tenure of Auditor as 5 years.
Conclusion
Hence,
considering the intention of the statute one can opine that auditor should be
given suitable opportunity of being heard as principle of natural justice and
company shall follow provisions of the act for prior approval of Central
Government for removal of Auditor.
Hence,
where company appointed petitioner-CA firm as its Statutory Auditor for period
of five years but did not ratify their appointment in its subsequent AGM and
appointed another CA firm as its statutory auditor, since company did not obtain
prior approval of central Government, removal of petitioner was to be held
illegal AGM.
Hence one can opine that, Company couldn't remove
its statutory auditor without prior approval from Central Government.
(Author
– CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice
from Delhi and can be contacted at csdiveshgoyal@gmail.com)
Disclaimer:
The
entire contents of this document have been prepared on the basis of relevant
provisions and as per the information existing at the time of the preparation.
Although care has been taken to ensure the accuracy, completeness and
reliability of the information provided, I assume no responsibility therefore.
Users of this information are expected to refer to the relevant existing
provisions of applicable Laws. The user of the information agrees that the
information is not a professional advice and is subject to change without
notice. I assume no responsibility for the consequences of use of such
information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT,
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[1]
As
per black law dictionary for the definition
of Ratification "the formation of a previous act then either by the party
himself or another, confirmation of voidable Act"
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